Business

What is SaaS Business Model? A Complete Guide!

The software-as-a-service industry has been one of the most dynamic and innovative in the world since John Koenig first coined the term “SaaS” in 2005. 

It’s never been a better time for a young SaaS company, with the field having experienced a couple of “knockout expansion years,” with more revenue pouring into SaaS than ever before.

All of this activity is powered by the SaaS business model, which is startlingly unique, still young, and inextricably linked to the power of cloud computing. 

When developing a strategy for your company’s future growth, it’s critical to understand the fundamentals of how SaaS works.

Marc Andreessen, a venture capitalist, wrote the now-famous article “Why Software Is Eating the World” in 2011. He made the audacious prediction that software would become an integral part of our daily lives.

Over a decade later, his prediction came true. Nowadays, software companies such as Google and Microsoft rank among the world’s most profitable and valuable businesses.

These applications are often based on the concept of Software as a Service (SaaS), which serves as the engine of growth for these companies.

According to a survey conducted by BetterCloud, 73% of businesses believe that by 2020, over 80% of applications they use will be SaaS-based.

The following article will discuss how software began to consume the world and why the SaaS business model is valuable.

What is SaaS?

SaaS, or software as a service, is a delivery model in which customers subscribe to centrally hosted software. 

Any business that leases software via a centralized, cloud-based system is considered a SaaS business.

A SaaS company is responsible for the servers, databases (and the data they contain), and other software necessary to access and use their product. 

Subscription plans offered to customers vary significantly between companies; some SaaS businesses model themselves on offering multiple applications within their product, with different subscription plans providing access to additional services.

SaaS is a subscription-based licensing model for software. The software is hosted in centralized cloud infrastructure and is accessible via the internet via a desktop or web application.

SaaS Business Model

The vendor hosts and maintains the servers, code infrastructure, and databases in the SaaS model. This represents a significant shift from on-premise software delivery in the 1990s and early 2000s. 

On-premise customers typically pay a one-time fee to install the software on their own hardware and a service and maintenance fee of between 15% and 20% per year.

Customers pay a monthly or yearly subscription fee for SaaS. In addition, SaaS businesses may offer a freemium version of their application with limited access in some cases. 

This enables customers to evaluate the product before making a financial commitment. Another possibility is to provide a free trial period for the entire product (similar to what Netflix does).

SaaS products are frequently focused on providing software applications to either private consumers (B2C) or other businesses (B2B). 

When SaaS businesses mature (i.e., acquire additional financial resources and workforce), they typically expand into new customer segments and industries.

What is the SaaS Business Model?

The software-as-a-service or SaaS model is based on the idea that businesses pay a monthly fee to access software hosted on a cloud infrastructure (i.e., accessible via a web browser). 

It often takes a combination of strong coding skills and robust user interface design abilities to make a SaaS product worthwhile truly.

In general, SaaS businesses are the most complex business models in our explainer series.

What is SaaS Business Model? A Complete Guide! 1

The primary distinction between SaaS businesses and software businesses is that SaaS is cloud-based. 

Essentially, this eliminates the need for an end-user license and any infrastructure required to host the software. Rather than that, the SaaS provider hosts their membership. 

The customer simply needs to log into their account to gain complete access.

The reason we’re distinguishing between the SaaS and other business models is that the SaaS model has several unique characteristics, including the following:

Recurring payments

Clients do not purchase hardware in SaaS. Because the software-as-a-service business model is subscription-based, you will have to worry about receiving payments on a monthly/annual basis rather than just once.

Monthly recurring revenue, or MRR, is a type of recurring payment. Because SaaS businesses provide a service rather than a product, properly accounting for revenue can be challenging. 

When a customer signs a contract and subscribes, you may receive some money upfront, but that money cannot be considered revenue until it is earned. 

Until then, it remains a liability—money that your customer may request back at any time if you fail to deliver your service.

Thus, revenue recognition is a critical component of the SaaS business model.

Consistent updates

While other products may release “next-gen” versions, SaaS providers consistently provide smaller, more frequent updates to their services to maintain a high level of customer retention.

A portion of this stems from the nature of the software business: software vulnerabilities can expose customer information to hackers, making it critical to constantly assess the state of security fixes in the SaaS model. 

Additionally, by hosting their own products, SaaS companies can release new features or enhanced versions of existing ones whenever necessary. 

Combining this with effective customer communication, SaaS companies can be extremely responsive to their customers’ needs and feedback.

Increased customer retention

Customer retention is critical for all businesses, but it is ten times more vital in SaaS business models because retention is the only thing that keeps you afloat. 

As previously stated, you cannot claim all of your clients’ subscription money until you have provided a complete term of service, which means that if you sign customers up for 12 months and leave after two, you will lose the remaining ten months recurring revenue.

As a result, the SaaS business model places a premium on customer relationship development and upselling. 

On average, an existing SaaS customer spends more than a new customer and is more than seven times as likely to churn (leave your business) due to poor customer service as they are for a better product.

Stages of SaaS businesses

As we will see shortly, highly successful SaaS businesses can command valuations in the hundreds of millions of dollars, serve millions of customers, and fundamentally alter how entire industries think about various aspects of their business. 

That, however, is the SaaS business model’s final and most successful stage.

A SaaS business’s life cycle can broadly be divided into three stages.

Early Stage

You’re still operating at a bare-bones level in the early stages of your SaaS business. As a result, you’re unlikely to have many customers at this stage, and your product is still in its infancy. 

You may be seeking your first round of pre-seed funding or have chosen to bootstrap your business to maintain greater control over your operations.

At this stage, your staff will still be small, you will almost certainly be concentrating your efforts on a single product, and you may not have begun to earn a profit yet.

At this point, you should be asking the following critical questions: Are metrics being tracked, and am I attempting to optimize pricing? 

Have I begun developing my own personal business model that will enable me to attract and utilize the appropriate type of funding?

Growth Stage

The growth stage is when the action begins to pick up. You’ve built something that is rapidly growing in popularity, your product is gaining subscribers, and you’re starting to generate MRR.

To begin and sustain your growth stage, you’ll need to start raising significant funds that will enable your company to expand its team, invest in product development and iteration, and scale. 

Numerous funding mechanisms are available to support the SaaS business model, including the following:

Venture Capital

The most glamorous method of funding a startup, venture capital, is provided by firms or funds that believe a SaaS company has high growth potential or a strong track record of recent growth, sufficient to merit substantial financial assistance.

Angel Investors

An angel investor is a single individual with substantial financial resources willing to invest in your business. 

They can be advantageous for startups seeking their first large investment, although, in recent years, so-called “super” angels have begun to play a significant role in subsequent funding rounds as well.

Venture capitalists and angel investors are not the only avenues for business growth. Some businesses go through incubators in their infancy; others, slightly more established SaaS businesses, find startup accelerators that meet their needs and utilize them for a different funding experience. 

Some businesses continue to bootstrap for an extended time, while others are so adept at generating revenue from the start that they do not require external funding until much later.

You should now be asking yourself the following questions: Have I established key performance indicators (KPIs) to determine whether I am prepared to scale further? 

Do I have a solid monetization strategy in place in case I decide to seek investment?

Mature Stage

A mature SaaS company has established itself and can consider itself established. A mature company caters to a well-defined target audience and maintains a stable product. 

The company is generating a healthy MRR, and all of the other critical KPIs (on which more later) are stable. 

Mature-stage companies may continue seeking and receiving investment, but it will be much larger in scale to establish new markets or acquire competitors.

At this point, the primary question a SaaS company should be asking is: When was the last time we reviewed our pricing strategies? 

What is SaaS Business Model? A Complete Guide! 2

SaaS businesses frequently reach a mature stage and succumb to complacency, believing that they must be operating at maximum capacity because their business is profitable. 

Indeed, mature SaaS companies are frequently positioned on a mountain of untapped revenue squandering through poor price point selection.

For example, the graph below illustrates the relationship between product value and customer willingness to pay for Hubstaff, a mature SaaS company. 

Hubstaff’s issue is not that they charge too much for their product, but that they charge too little for the precious features (for which their customers are willing to pay more) and do not organize their feature bundles well.

Advantages of the SaaS Business Models

The allure of the SaaS business model is that customers can develop an unhealthy obsession with your product. 

This is particularly true if your SaaS product represents a critical component of their businesses. After all, they are frequently adopting the status of “members” of your secret society.

For instance, Zendesk provides software that enables businesses to implement an effective customer service strategy. 

SaaS Business Model

There may be a new ticketing software that completely eclipses Zendesk. Still, because Zendesk is so critical to a business’s success and is so ingrained in its processes, the company is unlikely to abandon Zendesk in favor of the new and improved solution.

This loyalty can result in long-term customer retention, contributing to the burgeoning recurring revenue that makes SaaS products profitable.

This is the next major advantage of the SaaS model. Each customer is technically renting your software monthly rather than purchasing it outright.

That means that each month, you will earn an additional profit from that customer. Recurring revenue is frequently the goal of those who get involved with online businesses, and a SaaS business model is built around the concept of recurring revenue.

Recurring & Consistent Revenue

One of the primary benefits of the SaaS business model is the high predictability of revenue, as customers rarely cancel their subscriptions. 

According to Bessemer, a leading startup investor, less than 5% of all customers cancel their subscriptions during the first year.

Less Friction

Numerous SaaS offerings charge a flat monthly or yearly fee, which is simple for customers to comprehend (as they are used to this pricing model from subscription businesses such as Netflix or Spotify). 

Additionally, because there are no hidden fees, it is frequently easier to convert customers to subscribers.

Good Customer Relationships

SaaS customers frequently visit and use the application. This enables SaaS businesses to analyze how their users interact with the product and improvements.

Easy Expansion

Since the SaaS model does not require physical goods movement, it enables rapid expansion into new markets and countries.

Thus, growing SaaS companies can allocate financial resources to various marketing initiatives and eventually local country representatives.

Customer Lock-In

This is especially true for B2B SaaS companies, where the application is used to execute business processes. 

Manual labor would almost certainly be prohibitively expensive, whereas SaaS software adds additional time and cost savings. 

As a result, organizations develop their processes around SaaS, effectively creating a lock-in effect.

No Piracy

Since SaaS products are frequently delivered via web applications, illegal distribution becomes obsolete.

Disadvantages of the SaaS Business Model

While recurring revenue is highly desirable, the large sum of money required to launch your SaaS business is not nearly as appealing.

You will need to make numerous investments initially, such as hiring competent developers, programmers, and user interface designers who will combine their talents to create the most user-friendly and efficient product possible.

Once you DO get a product off the ground and have a few customers demonstrating the model’s value, you will almost certainly need to reinvest all of your profits — along with some additional capital — to scale the business. 

You’ll need to expand your data capabilities, security, and storage and retain your team to handle maintenance and any unanticipated issues that are certain to arise during this hypergrowth phase.

Apart from the capital-intensive business model, another disadvantage of SaaS is that it is frequently not a simple product. Thus, while the model itself is straightforward, effectively maintaining the actual product can be challenging, even for those who understand all of the coding involved.

This can make selling a SaaS product more challenging. You deal with a more limited pool of prospective business buyers than you would with someone interested in Amazon FBA or lead generation.

High Set-up Costs

Customers will not subscribe to a half-finished product, which means SaaS companies must invest sufficient (financial) resources to complete their offering. 

According to SaaS Developers, it would cost me approximately $100,000 to build the first version of your SaaS.

Easy To Cancel

Unlike B2B SaaS companies, which frequently benefit from solid customer lock-in, B2C SaaS companies suffer from the ease with which SaaS subscriptions can be canceled (one of the biggest selling points given to customers).

Easy To Copy.

Due to the ease with which SaaS can be distributed globally, potential competitors can firsthand look at the software and instantly copy its features. 

As a result, SaaS businesses must constantly innovate and find new customer acquisition methods to remain relevant.

Security

SaaS businesses are susceptible to malicious intrusions and data loss, as with any company operating within the internet’s realms. 

As such, SaaS businesses must make significant investments to ensure their application and customer data security at all times.

SaaS Business Models Metrics & KPIs

Similar to subscription models, there are three critical activities for SaaS success:

  1. Customer Acquisition.
  2. Customer Retention.
  3. Customer Monetization.

To maximize our efforts and resources on these activities, we must track our progress at each stage.

Nonetheless, SaaS companies (and any other business type) must practice some frugality with metrics. 

KPI Overload, the practice of tracking an excessive number of metrics, can erode your focus and thus stymie growth.

To keep things simple, we’ll concentrate on a few critical metrics for each activity. If you’re interested in learning more about other KPIs, I can only recommend Ryan Law’s comprehensive guide to SaaS metrics.

Customers Acquiring 

According to The Software Report, over 10,000 SaaS companies have been registered globally. In such a crowded space, acquiring new users can become prohibitively expensive.

For example, Slack spent a whopping $230 million on user acquisition in the fiscal year 2019.

To maintain a reasonable cost structure, we must monitor the effectiveness of your sales and marketing campaigns. The following metrics assist us in accomplishing this.

Customer Acquisition Cost (CAC)

Customer acquisition cost reflects the amount of money spent on acquiring a new customer. 

According to David Skok, CAC is frequently a startup killer, as many businesses struggle to find low-cost customer acquisition methods.

Understanding the cost of acquiring new customers and identifying the most profitable marketing channels is critical for profitability.

To calculate CAC, divide your total marketing and sales costs by the number of customers acquired during a specified period.

CAC = Sales and marketing costs ÷ new customers

Conversion Rate (CR)

In layman’s terms, conversion rates indicate how many people completed a particular process after initiating it.

When it comes to customer acquisition, we use CR to determine the effectiveness of each marketing campaign.

As a result, the CR is calculated as follows:

CR = Number Of People Finishing An Action ÷ Number Of People Starting An Action.

This sounds ambiguous because conversion rates can be applied to any stage of the user flow. For example, consider a LinkedIn advertisement promoting your product.

During the duration of the ad’s run, 1,000 people will see your product in their feed. From those 1,000 users, 150 will click on your advertisement, and ten will register for your product. Depending on the metric used, the result will yield a range of conversion rates.

For example, your advertisement’s conversion rate (or Click Through Rate) would be 150 1,000 = 15%. In comparison, your ad to sign-up CR would be 10 1,000 = 1%.

Conversion rates enable you to test various marketing tactics.

For example, you can test different times, regions, or platforms for your ads to determine which channels are the most cost-effective.

Finally, it should be noted that there is no such thing as a “good” or “standard” conversion rate. Rather than that, you should strive to improve the metric continuously.

Customer Acquisition Rate (CAR)

Along with determining the effectiveness and cost of your sales and marketing campaigns, it is critical to decide on the rate at which you acquire new customers. 

To do so, you must first determine your customer acquisition rate.

CAR provides a bird’ eye view of the effectiveness of all of your acquisition efforts over a specified time. 

It is calculated by dividing the number of acquired users by the duration of the time under consideration.

CAR = Number Of Acquired Users ÷ Length Of Period

Therefore, if you acquired 1200 Fenix months, conversion rates, your monthly CAR is 1200 6 = 200 users.

The beauty of CAR is that it can be compared across your business’s timeline. As a result, you can evaluate all of your acquisition initiatives holistically.

Given that SaaS customers frequently have a high lifetime monetary value (more on that later), optimizing your CAR should be the primary objective of your business.

Product Qualified Leads (PQL)

Product qualified leads are prospective customers who have used your product in a meaningful way previously. PQLs are critical to track when your SaaS business includes a freemium component.

When you contact a PQL (to convert him to a paid user), that individual has already extensively used your product and thus does not require any marketing or promotional tactics.

PQLs can be identified by examining users who have converted to a paid plan in the past. PQLs are evaluated differently depending on the type of features and products.

For example, the data consolidation platform databox analyzes time spent within the product, the number of features utilized, and the number of log-ins. 

A PQL is someone who has had over 100 conversations in Drift’s tool.

The following is an example of product behavior that can be used to identify a PQL:

  • Utilization of features.
  • Patterns of spending and usage.
  • Velocity refers to the rate at which an individual or team adopts your product.
  • Interest in the product, e.g., via social media shares or interactions with other users.

Retaining Customers

As previously stated, acquiring SaaS customers can be extremely costly. As a result, you’ll want to keep them registered for as long as possible.

The following metrics assist you in determining how long customers stay, what causes them to leave, and what you might be able to do about it.

Churn

Churn rate is a critical metric for any SaaS business to understand and track. Therefore, we frequently distinguish between two essential metrics of churn: customer churn and revenue churn, when discussing churn.

Customer churn is a metric that indicates the percentage of users who abandon your service over a specified time. 

In comparison, revenue churn refers to the rate at which revenue is lost periodically.

Frequently, SaaS founders examine these two metrics on a monthly and annual basis.

The following formula is used to determine customer churn:

Customer Churn = (Customers Beginning Of Period – Customers End Of Period) ÷ Customers Beginning Of Period.

Therefore, if your business started with 500 customers and ended with 480, your customer churn rate would be (500 – 480) 480 = 4%. 

For revenue churn, the same formula would be applied to your monthly recurring revenue (MRR) rather than the total number of customers.

Churn rates are critical for SaaS businesses with a more extensive user base. For example, if you have a hundred customers, replacing two or three of them is not a difficult task (equal to a 3 percent churn rate). 

However, a million-customer business would lose 30,000 customers per month. It would be prohibitively expensive to replace that many customers each month.

Additionally, over time, churn rates can compound. For example, a monthly churn rate of 3% equals a year-over-year rate of 31%. 

You’d end up replacing nearly a third of your customer base to maintain your user base. Thus, the more customers you have, the greater the investment required to keep them happy.

Net Promoter Score (NPS)

Therefore, how do you determine whether or not your customers are satisfied with your product? One possible indicator is your product’s Net Promoter Score. 

SaaS Business Model

It serves as a direct indicator of the value your customers receive from your product.

NPS indicates the likelihood that a customer will recommend your business or product to another. 

It operates on a scale of 0 to 10, with 0 indicating they would not recommend your product and 10 indicating they would strongly recommend it.

Typically, NPS is classified into three distinct categories, which are as follows:

  • Detractors (customers who give a score between 0 and 6).
  • Inactives (customers giving a score of 7 or 8).
  • Promoters (customers giving a score of 9 or 10).

NPS is calculated by subtracting the detractors’ percentage from the promoters’ percentage.

NPS = % Promoters – % Detractors

The result should be in the range of -100 to +100. So, for example, if you have 70% promoters, 15% passives, and 15% detractors, your NPS would be equal to 70% – 15% = 55.

Product Usage

This is a somewhat ambiguous term, as each SaaS company offers unique features and tools to their customers. 

Therefore, you’d want to begin by defining those critical features and developing metrics around them.

For instance, a company like Dropbox would likely examine the volume of files uploaded by their users and how they are stored.

Zoom’s video platform could analyze the average duration of each video call and the call’s video and audio quality. 

Finally, Slack may take into account the quantity of content shared and Slack groups created.

To summarize, identify the critical features that contribute to your product’s experience and develop metrics around them. 

Only by tracking how customers interact with them can you truly improve your user experience.

Monetizing Customers

Now that we’ve acquired all of those customers, what’s next? Ideally, you’d like to monetize them in some way.

Consider a few metrics that enable us to determine how much revenue we earn from each customer and maximize our revenue.

Average Revenue Per Account (ARPA)

The average revenue per account (also called average revenue per user or unit) is a metric that indicates how much revenue an average account generates. 

ARPA is typically calculated monthly. However, ARPA can also be calculated quarterly or annually, depending on your billing period.

ARPA is calculated by adding up your monthly MRR and dividing it by the total number of customers in that month.

ARPA = MRR ÷ Total Number Of Customers

If your MRR is $100,000 and you have 5,000 customers, your ARPA equals $100,000 5,000 = $200/account.

ARPA is beneficial when calculating it for distinct customer segments. As a result, you can determine which customers generate the most revenue and direct your acquisition strategies toward this group.

Monthly Recurring Revenue (MRR)

Every SaaS business relies on recurring revenue. As a result, it is critical to understand how much money you can expect to earn in a given month (or year, for that matter). MRR informs you of this.

MRR is easily calculated by adding up all of your business’s revenue earned from paying customers in a given month. 

Alternatively, if you know your average revenue per account (ARPA), you can calculate MRR by multiplying ARPU by your total customer count.

Revenue that is generated regularly is what makes SaaS businesses so appealing. As long as you continue to provide excellent service, customers are doubtful to churn.

Several strategies for increasing your MRR include the following:

  • First, simply inflate the price of your product.
  • Upselling is accomplished through the use of different pricing plans or add-on features.
  • Elimination of an existing price ceiling.
  • Eliminating your free plan to attract only financially savvy customers.

Determine whether or not these apply to your business by experimenting with various pricing models.

Customer Lifetime Value (CLV)

Customer lifetime value indicates how much money your users spend on your service during their membership period. The more extended customers stay with your service or pay more, the greater their lifetime value.

Knowing how much money you earn from a customer can assist you in determining how much money you can spend on their acquisition. 

Additionally, you can segment your LTV into distinct customer segments, allowing you to target them more precisely.

CLV = ARPA ÷ Customer Churn Rate

To calculate CLV, you must first determine the churn rate of your customers and the average revenue per account (ARPA). 

Then you divide your ARPA by the churn rate of your customers.

For example, if the average revenue per account is $500 and the customer churn rate is 5%, we would generate a CLV of $500 5% = $10,000.

It should be noted that calculating LTV makes sense only for businesses with a large number of customers. Small companies (often B2B) experience more significant fluctuations in customer spending, making LTV challenging to predict.

Growth Strategies for SaaS

There are numerous paths to take when it comes to scaling a SaaS business.

The strategies you choose for growth are highly dependent on your core competencies and what has worked best for you in the past. 

Regardless, here are some strategies for scaling a SaaS business to the next level of profitability.

Increase Organic Traffic

It’s self-evident that the best traffic that converts the best is typically organic search traffic from Google and Bing. 

One way to determine how to improve your organic search is to use a tool like SEMRush to assess your current ranking.

This is a straightforward strategy to implement, and I discuss it in greater detail in this article about low-hanging fruit for Adsense and Amazon businesses.

Add Product Upsells

This is an excellent option to offer existing customers, benefiting them and earning you more money. These upsell could be premium packages for which the customer pays an additional monthly fee in exchange for extra features, benefits, data storage, or all of the above. 

Additionally, it could be a one-time upsell — perhaps an information product, such as a high-impact webinar, on how to maximize your software’s potential. 

This is the concept behind the “freemium” pricing model, in which you entice customers with limited functionality for free, train them on your product, and then charge them.

Whatever upsell you choose, always keep in mind the associated costs so you can factor them into the final price your customers will pay for the upsold service.

Introduce New Marketing Channels

When it comes to evaluating a new strategy, establish some traction goals. First, ascertain that you will invest sufficiently in the new marketing channel to achieve statistically significant numbers. Otherwise, there is little reason to invest in it.

A new marketing channel could be as straightforward as converting your best organic ranking or most popular content into a Youtube video. 

After all, it is the world’s second-largest search engine, so it is worthwhile to be found there.

Faster. Stronger. Cleaner.

One way to increase customer satisfaction and loyalty (while also lowering some infrastructure costs) is to optimize your software’s performance by eliminating lousy code. 

Decluttering destructive or inefficient code can significantly improve your software’s performance, thereby increasing your customers’ overall satisfaction with the product.

Make it more lean, mean, and profitable.

Add an Affiliate Program

Adding an affiliate program to your business can be a huge boon. Mainly if you offer a lucrative affiliate program that can attract highly qualified affiliates to promote your offer.

You can take numerous paths, but if you want to attract affiliates the most effectively, you may want to offer a residual income opportunity. This is frequently more appealing than a one-time payment in a SaaS business model.

On the other hand, if you’re confident in your CAC and LTV figures, you might just offer a large, upfront, one-time payment to the affiliate, satisfied that the average customer will stick around long enough to recoup the affiliate’s costs.

Certain affiliates prefer this, as their marketing campaigns frequently operate on razor-thin margins.

In either case, an affiliate program can be an incredible way to boost your marketing power while also relieving you of much of the actual marketing work.

Global Size of SaaS Market

Gartner forecasts that the global cloud computing market (as represented by SaaS, IaaS, and PaaS, among others) will grow by more than 17% in 2019, reaching $214.3 billion in customer spending.

That figure is expected to more than double to $331.2 billion by 2022. SaaS accounts for $143.7 billion (or 43% of anticipated revenue). SaaS is a market worth close to $95 billion in 2019.

In 2018, SaaS companies raised a total of $38.2 billion through initial public offerings. This is partly due to modern organizations’ increased use of SaaS software. 

According to Blissfully’s research, businesses with more than 250 employees use more than 100 SaaS products. Smaller companies (up to 50 employees) typically use between 25 and 50 applications.

Microsoft is the market leader in the Enterprise (B2B) space in terms of customer spending. Salesforce, Adobe, SAP, and Oracle are the next three.

Read, How Does TaskRabbit Make Money?

SaaS Lead Generation & Marketing Channels

Tomasz Tunguz, a partner at early-stage venture capital firm Redpoint Ventures, identifies five critical marketing and customer acquisition channels that “great SaaS companies” leverage. These include the following:

Content Marketing

Within its niche, a SaaS business publishes text, audio, or video content. The content is typically informative but may also contain hints about the company’s product. HubSpot, for example, makes extensive use of content marketing via its eponymous HubSpot blog.

Referral Marketing

Businesses that provide SaaS services can gain new customers through referrals and referral programs. Frequently, existing users refer people in their immediate circle in exchange for compensation (e.g., discount codes, cash).

Advertising

While traditional advertising (such as television or billboards) may not be the most efficient marketing channel for SaaS businesses, they can and should undoubtedly leverage modern solutions. 

YouTube, Facebook, Linked In, Reddit, and Google Ads are all possible channels, depending on your niche. Consider this Grammarly advertisement as an illustration!

Channels

Certain SaaS providers distribute their software via multiple channels, such as the Google PlayStore or the Apple AppStore. 

While your business is at the mercy of Apple and Google, there are specific tactics you can employ to improve your rankings. Appropriate and succinct descriptions, explanatory product images and videos, and country-specific versions of your app are all examples.

Events

Whether as part of a more significant event or independently organized, event marketing can help you connect with new customers, demonstrate your product, and spread the brand message. 

Salesforce, for example, hosts an annual conference called Dreamforce, which drew more than 170,000 attendees in 2019. This blog post contains an exclusive list of SaaS events and conferences.

SaaS businesses can furthermore utilize freemium as part of their customer acquisition strategy. Two types of approaches exist:

Limited Product Trial

Users gain access to a restricted set of features or functionality that does not expire. Dropbox, for example, offers a free trial period during which customers can access all of the platform’s features. A limitation is accomplished by using a maximum upload volume (in this case, 1GB).

Timed Product Trial

For a limited time, customers are granted full access to the platform. This can range from a week to a month.

Checkout, How Does Binance Make Money?

Growth Strategies for SaaS Products

When it comes to scaling a SaaS company, there are many options.

Your growth strategy depends on what your core competencies are and what has proven successful in the past. Here are some strategies for scaling a SaaS firm to the next level of profitability.

Create new marketing channels

Setting traction goals for a new strategy will help you evaluate it. Ensure you will invest enough in the new marketing channel to achieve statistically significant results. Otherwise, there is little reason to invest.

Your highest organic ranking or most popular content might be easily converted into a Youtube video as a new marketing channel. It is the second-largest search engine in the world, so being found there is worthwhile.

Increase Organic Traffic

There is no doubt organic search traffic generated by Google and Bing is the most likely to convert the best. 

The easiest way to determine how to improve your organic search is to use a service like SEMRush to assess your current ranking.

This is a straightforward method to follow, and I go into more detail about it in this article about low-hanging fruit for Adsense and Amazon businesses.

Add an Affiliate Program

Affiliate marketing can be a significant boon to your business. This is particularly true if your affiliate program is rich and could offer highly qualified affiliates to promote your product.

You can earn affiliate commissions in various ways, but a residual income option may be the most effective way to attract affiliates. SaaS companies often offer this as an alternative to paying a one-time fee.

However, suppose you’re confident in your CAC and LTV numbers. In that case, you might simply offer the affiliate a hefty upfront payment, satisfied that the average consumer will stick around long enough to cover the affiliate’s costs.

Many affiliate program operators are attracted to this, as their marketing campaigns are often operated at razor-thin margins.

An affiliate network may be an excellent method for increasing your marketing power while simultaneously relieving you of most of the hard work.

Add Product Upsells

Providing existing customers with this alternative is a great idea, as it benefits them and earns you extra money. 

Upsells may be premium packages for which a consumer pays an extra monthly fee in exchange for additional features, perks, data storage, or all of the above. 

Also, it may be a one-time upsell – maybe a webinar on how to maximize the potential of your software. 

With the “freemium” pricing model, you lure users with limited functionality for free, train them on your product, then charge them.

Regardless of the upsell you decide to offer, make sure you keep in mind the associated costs so you can add them to the final price your clients will pay.

Faster. Stronger. Cleaner.

Optimizing your software’s performance (while reducing some infrastructure costs) is one way to increase customer happiness. 

It is possible to significantly improve your software’s performance by decluttering faulty or inefficient code, thus enhancing your clients’ overall satisfaction.

It should be lean, mean, and profitable.

SaaS Business Model Optimization Tools

We offer a few tools to help you get started with the SaaS model if you are new to it. In addition, you should consider investing in tools that enable you to track the metrics outlined above, as well as the health of your organization, regardless of whether they are free or premium versions.

Customer Relationship Management Tool

You need a customer relationship management platform to keep an accurate and comprehensive database of the customers your team is currently selling to, are current customers, or have churned. 

You can track growth, CAC, MRR, and churn the more you understand the relationships with which your business interacts. 

You can create a basic CRM using spreadsheets – this will simply be more difficult than using Salesforce, Hubspot, and Oracle.

Analytics Tool

Get a solution that will allow you to track all of your company’s data precisely. For example, you can use Google Analytics or manually track your stats using a spreadsheet application if you cannot invest immediately. Tableau and Looker are excellent options if your budget allows.

Visible Tool

Our SaaS business model must also be disclosed as part of our growth strategy. Once you’ve secured money, we’re the most comprehensive tool for communicating with your entire team and managing existing and new investor connections.

Checkout, How Does Mozilla Make Money?

About the author

Madhav

Hey Folks, I am Madhav! I lead a team of Marketers at Tech Startup based in Australia. In my free time, I dissect the business models of various businesses. And if there's any free time, I cook some new Dish!